Ultimate guide on business budget planning in 2023

Apr 05, 2024

Moving into the start of the new year with the arrival of 2023, businesses will once again have new growth targets to achieve.

To meet these goals, it’s imperative for business leaders and finance professionals to review their numbers from the past year and set out new budgets to support business growth.

You want to ensure that coming into 2023, you are equipped with good business budget planning that takes into account both your organization and the market that it operates. Make the most of your 2023 Q1 by optimizing your business budgets.

Why business budget planning?

If you have an expense budget, you can be well prepared to face it. You need a business budget planning to display projections for the upcoming year.

Making budget plans will prepare you to manage a natural cash flow, allocate and utilize resources appropriately, and take measured and calculative steps towards new investments. While planning business expenses for small business financial management, you know how much running capital you have in store, the income generated last year, and goals for the next financial year.

Additionally, a budget makes you leave the past while using its data and learnings to predict the future. You no longer crib about what went wrong; instead, face the new year with unbreakable courage and a perfect budget plan. 

This holistic approach to handling money and expenses is critical to developing a strong and healthy financial backing for your company.

As a result of the dramatic fold of events in the past two years, 2023 is crucial for many to come off with flying colors and reach beyond what they planned. A budget can set a seal on it. Budgeting for business owners can sound daunting but can be accomplished with business budgeting tools and strategies.

Effective business financial planning process

Financial planning is not just about budgeting and planning how to spend money. Effective financial planning should also include what the company intends to achieve next year and the financing needs.

Here is what your budgeting 2023 plan should look like. Should have started with achievable company goals, objectives, and strategies for the upcoming year and made a roadmap to achieve them.

The finance team should have an understanding of where the company stands financially right now. Make financial projections and estimate the income and profit based on the upcoming year’s sales goals. An accountant should have worked with the finance team to create balance sheets like profit and loss statements, tax expenses estimations, and financial projections.

Financial projections can help in communicating whether you need financial assistance or not. An adequate financial budget should have highlighted that and pushed the team to arrange finances if needed.

The business financial plan should also contain backup strategies. What if there is a sudden requirement for resources or an unexpected loss? The program should also include an emergency backup plan.

Should have room for feedback - Recording every step of the financial plan as it happens to see if the expenses align with the budgets and financial schedule. Is there a department or area that needs to be addressed specially and specifically? - A financial plan should have included that.

Key steps to follow when creating business budget

Now that you know what an effective financial plan looks like. Let’s go into creating your exemplary business financial plan for 2023.

1. Research & categorize costs

With the help of the previous year’s spending records, you can make estimates and find significant categories of expenses. There are different kinds of costs a company incurs which you must be aware of. 

Make use of the spreadsheets used by the accounting department to identify the fixed and variable expense categories. Use data from any accounting software your team uses. There are fixed costs like rent, subscription, payroll, and insurance.

There are variable costs like material costs, internet and electricity bills, marketing and advertising, and office supplies, and there are one-time expenses like machinery, maintenance, or repair costs. 

To make this step uncomplicated, implement automation software for expense management next year onwards and label each cost. At the end of this stage, the budget team should have a clear idea of every cost category and their range of expenditure.

2. Focus on projecting revenue

Revenue prediction and projection is the next step. Forecasting revenue in advance can be tricky. It requires you to determine the approximate figure for sales or deals closed next year.

Furthermore, if there are any plans to increase the price of the services/products or introduce additional features/products, you must also count that. 

Projected revenue is the multiplication of the expected number of closing/sales and the total amount charged for that. This estimation doesn’t include any expenses spent by the company or tax expenses but only the revenue obtained from selling the product.

Take inputs from your sales team as they might have developed their sales objectives and hiring plans for next year.

3. Improve gross margin profit

The numbers that you have so far are the expense and revenue estimates. Gross margin or gross profit margin is the overall profit made by the company.

That is, when you minus the overall costs with total revenue, you will get the gross margin. The result can be positive, negative, or even zero if you have a low-profit margin.

The goal is to improve the margin by increasing the product cost or reducing expenses. A sudden increase in product cost is not easy to accomplish as it can be harsh on your current customers.

So, you can start with regulatory measures on expenses. See which category is overly expensive and which costs could be avoided or reduced. Establish measures to follow to improve gross profit.

4. Plan a 12-month cash-flow projection

Cash flow is the running capital businesses use to run their day-to-day operations. Make a detailed report of the money that will go in and out of business during the upcoming year.

The residing cash flow should be known or predictable at any given time in the next year.

A cash flow prediction can be constructed quickly with a few charts or software by feeding the predicted expenses and income. 

Being aware of the cash flow of the future makes a finance team plan variable and one-time expenses accordingly and throws light on anticipated dues and revenue. 

The basic idea behind the cash flow revelation is adding income to the opening balance while subtracting costs and expenses at different times.

5. Adjust as per seasons

Every business has its light and heavy sale days or seasons. Apart from sales, some costs vary on different occasions of the year. The budget has to take them into account for extreme precision.

It’s evident that your company will take advantage of these seasons and formulate exclusive strategies. It’s also about budgeting. A bird’s eye view is needed here rather than a bull’s eye approach.

Let’s say your company has its peak sale around a regional festival. Not just the sale but the marketing, warehousing, and shipping expenses cannot be missed in a budget. Make sure it’s all considered and added to the financial plan.

6. Adjust for market and industry trends and changes

Budgeters should have a comprehensive understanding of industry trends and be keen on any significant changes that might hit on. A perfect example of this can be increased or decreased fuel prices or material costs.

Forecasting trends may always not come true but considering them is crucial as this can affect your cash flow by shooting up expenses. Other factors like natural calamities or political or economic factors can potentially affect your business operations or sales. 

While it’s not always possible to know everything, updated knowledge about the current industrial situation and precise perception of the future can assist here.

7. Create a spend-strategy

Strategic spending differs a lot from spending. Creating spend strategies isn’t merely putting a cap on finances allocated for different categories.

Budget experts should meticulously inspect every expense to identify the spending that plays a role in making profits. Here is what they should do to maximize the ROI of every penny.

● Uncover the loopholes in current spend management

● Find cost-effective alternatives

● Recognize and rule out unnecessary spending. 

A financial plan should improvise the spend strategy you already have to hone your financial habits.

Along with this, putting a payment automation system into effect can help you oversee if this goes as planned.

8. Negotiate costs and deals with suppliers

A few months or years into the business, you would have formed a strong relationship with your vendors. It’s time to turn them in your favor now and do better negotiations for orders. Follow this same strategy with the new dealers and suppliers too.

Material costs form a majority of the expense spent. A few goodwill offers can go a long way to reducing this expense. This expense reduction can increase the profit margin and make your budget a hit.

9. Discuss budgets and expenditures with every department

As you have made the predictions, it’s time to make the team aware. Because every team has a role to play in making the budget pan out.

Assign different team strategies and communicate with them about allocated budgets and each team’s expected outcome.

Uplifting and motivating the team is pivotal to ensuring everyone is on the same page.

10. Determine and manage investments

If your business has other assets or made investments, it’s time to review them. An investment is successful only if the returns are fruitful. Investments are the way to exponentialize your business capital if done correctly.

Check the income and returns from your business investments and draw ways to systemize them. While working on this, plan a new investment or expand old investments.

11. List income sources

Income can be from a wide range of sources. It can be from selling your products or services, selling add-ons or exclusive features of your product, or any investment made or even an approved bank loan.

List the sources of incoming money into your business at different times of the financial year. An income list can show you where you stand financially and how much capital you are left with.

12. Have a contingency plan in place

It cannot be stressed enough that unforeseen circumstances always happen. Things may not go as planned always. Develop an emergency plan by brainstorming an unlikely scenario that can potentially affect your business.

Do risk assessments and determine the extent of effect in each situation. Allocate emergency funds and create strategies to mitigate business risks. Pay focus to rescue measures to follow post situation. You can trust cash reserves greatly during these moments as they can bring a balance to the running cash flow.

How to plan your company’s expenses for 2023?

In the previous section, the importance of expenses and how to streamline them has been greatly emphasized. Expense planning is the key to ensuring a positive cash flow and wider profit margins. So, how to plan these expenses to master budgeting for 2023.

Step 1: Consider what worked in the past

Go through your previous budget plans. You can easily find two or more spending strategies that have done the trick. Bring them back to action. Check the budgets assigned for different categories in the past.

You can feed them into an automated system and get the range between which each category’s expense lies. Take advantage of the past data to create your budget and expense plan for 2023.

Step 2: Keep track of any legislation changes that may have an impact on your business

Keep abreast of any news and updates relevant to law and legislation, especially something that’s related to your industry. Many government official sites and news platforms publish information pertinent to this. Generally, these laws and regulations take time to come into effect. Keep track of it and stay up to date.

Step 3: Prepare for a possible shift in the tax landscape and keep an eye on your marginal tax rate

You can also prepare for tax filing and returns as you have predicted income for the upcoming year. It is possible to calculate business expenses for taxes with the help of projected revenue.

This way, your auditing team can gear up towards gathering documents for filing taxes and plan them ahead. Additionally, your company can engage in tax-saving activities to reduce the overall expenses.

Step 4: Examine your entire investing portfolio

An integrated investment portfolio should be your goal for the year 2023. It’s the investment process that combines every investment source like mutual funds, equities, fixed deposits, gold, stocks, and real estate.

Going for a perfect mix where you combine maximum profitable sources among these can guarantee full returns. Whether or not you have investments and assets, planning this for the next year can benefit your business finances by providing a stable income.

Step 5: Set a target for debt repayment

Depts are like backlogs which can hamper your cash flow for a long time. Establish a new routine and hunt for ways to clear them sooner. Set an achievable target period to repay the debt. Based on the running cash flow, you can plan how much you can schedule for each payment cycle.

Step 6: Plan ahead for travel and logistics

Travel preferences of employees are changing, and there has been a paradigm shift in recent years due to the extended use of online meeting tools. At the same time, Airbnb’s data shows that there has been an increase in hotel bookings and travel (including both business and personal).

But what has been different this time is a sizeable change in people planning their logistics and trip to avoid last-minute expenses. Having a clear T&E policy and equipping your employees with sufficient travel budget costs, tools, and resources they need is the way to turn this cost-effective.

Budgeting mistakes to avoid for better financial management in 2023

You are aware of the do’s of budgeting 2023, but here are some big NO’s that you should shun while making budgeting plans.

Speculative budget planning

A business budget plan must be data-centric, considering previous years’ accounting and finance data. Looking through last year's data can show what went right and wrong to confirm that you don’t fall into the same pitfalls. You need Data backed budgeting for setting an achievable yet challenging level of goals and budget to meet for the consecutive year. 

Even though you consider past data, it’s only for reference. Because there might be updated prices, different socio-economic conditions, disparate team strengths, and many other changing/changed factors.   

Top-down or bottom-up budgeting?

There are two types of budgeting a company can follow. One is bottoms up, and another is top-down budgeting. When you estimate sales first, calculate expenses needed, set profit margin and finally come to setting budgets, then it’s top-down budgeting, and bottom-up is vice versa. A mix of this approach will never work.

Setting sky-high sales goals

Setting wrong or unachievable sales goals can project incorrect revenue and also overwhelm the hardworking sales team. Go through the previous year’s goals and identify how much has been achieved. Base your current year’s plans on that. 

Set an accomplishable and time-bound goal based on real, scientific data considering the current strength of your sales team and the skills and resources they possess. There are powerful sales tools that allow you to feed data into them to get ideal objectives and projections.

Not only sales that undergo mammoth level expectations, but also expense control where the projections are made keeping only cost-cutting in mind. Unrealistic expectations or wrong quotations can mess up the whole budgeting process.

Not tracking the progress

Making accurate budgets and setting realistic targets are all fine. But what if you don’t track the performance in real-time? Checking here and there or updating manually in spreadsheets is not an apt solution.

There are chances that they are not up-to-date or miss something. Constant monitoring works like a charm in avoiding unprecedented mistakes saving time and money for you. And if all of your accounting platforms integrate with each other, it will be an added advantage. Use business budgeting tools to track the progress of your budgeting 2023.

Innovative money management platforms like Volopay give you the liberty to constantly be in the know about every particular regarding your business spending. This 2023, modernize your payment management with the help of Volopay and keep track of payments.

Missing out on communication

Finally, you should share the action plans and assigned budgets with every team responsible for sticking to them. Without conveying the need, expecting exceptional work from them will be unfair.

Finally, small business financial management is a team activity that prolongs till the end of the year until the goals are met. After crossing a rough patch, your teams will roll their sleeves and prepare for a full-swing performance. 

So, you know the importance of making a neat business financial plan that touches all edges and gets excellent work done by everyone. While you gird your loins with the best financial strategies, remember that it’s never too late to start your small business financial management. Achieve your financial goals for 2023 with Volopay alongside.

Spend, save, and plan your business expenses more efficiently